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What happens when the system games the system? Potential disaster, says an American Enterprise Institute report on the Federal Housing Administration.

In December, the 30-day-plus delinquency rate on FHA insured loans rose to nearly 18%, from 17.42% in November. The rise came even as Congress further unfettered the agency, raising the $625,750 conforming loan limit it had imposed under Dodd-Frank "reform" to $729,750.

Given that FHA loans were designed to help low- and moderate-income borrowers finance as much as 97% of their home's purchase price, the higher limits seem to defy reason. Moreover, as the report "Bet the House: Why the FHA is Going (for) Broke," by Peter J. Wallison and Edward J. Pinto, points out, the FHA isn't subject to the same capital requirements or accounting methods private-market insurers must meet. Thus, the authors write, the agency's traditional single-family program has about $1.2 billion of capital supporting more than $1 trillion of loan guarantees, leaving it levered by nearly 1,000-to-one.

FHA Folly: While Congress allows the FHA to raise loan limits, delinquencies rise on its more than $1 trillion book.
William Waitzman for Barron's

The FHA is "a Ponzi-type scheme," contends Pinto. The report says the agency, measured by the accounting that is used by private insurers, is "deeply insolvent," with a capital shortfall of $35 billion, and that if it were private, regulators would "immediately shut it down." Pinto asserts as well that the FHA must take market share from private insurers in order to stay afloat.

A spokesman for the Department of Housing and Urban Development, which includes the FHA, declined to comment. Meanwhile, the FHA wants to relax credit scores for borrowers.

More joy for the taxpayer?

Last Week: Review

Movin' On Up

U.S. equities traded to six-month highs, helped by decent earnings reports and economic news, as well as positive auction activity in Europe. On the week, the Dow Jones Industrial Average closed up 2.4%, at 12,720. The Standard & Poor's 500 index finished up 2%, at 1315, and the Nasdaq was up 2.8%, to end at 2787.

House-Happy

The home builders' sentiment index rose in January to its highest level since June 2007, fueling an upward run in home-building stocks. Housing starts fell 4.1% in December, to an annualized rate of 679,000. Separately, some one million home owners could lower the size of their mortgages in a proposed deal with banks over their foreclosure practices, the housing-agency chief said.

Mixed Banking Bag

Thumbs Down on Pipeline

President Barack Obama rejected a Canadian company's plan to build a $7 billion oil pipeline across the U.S., saying the Keystone XL project needs more of a review for its environmental impact.

Show Them Some Money

The International Monetary Fund is seeking to more than double its lending capacity, by raising $500 billion. The U.S. said it has no plans to make new bilateral loans, although euro-area countries have already pledged $192 billion. Separately, the World Bank warned that the euro- area crisis could cause a global slump, and slashed its growth forecasts the most in three years.

Insider Probe Grows

Seven people, some of them employees of well-known hedge funds like SAC Capital, were charged with securities fraud and conspiracy in Manhattan federal court, as part of a longtime insider-trading probe. Prosecutors alleged the scheme, which involved trades in Dell, netted the group more than $60 million in illegal profits.

An Icon in Bankruptcy

Eastman Kodak, the iconic camera company, filed for Chapter 11 bankruptcy protection after struggling to stay above water for some time. According to court papers, Kodak had about $5.1 billion of assets and $6.75 billion of liabilities.

Slowing Down

In the fourth quarter, China's economy grew at an annualized 8.9%, its weakest pace in two years. Although the result was slightly better than expected, analysts said it increased the possibility of further Chinese easing. Separately, China sold U.S. Treasuries in November, though it remained the largest foreign holder.

Then There Were Four

Texas Gov. Rick Perry dropped his bid for the Republican presidential nomination and endorsed Newt Gingrich, leaving just four hopefuls.

Swan Song

Jerry Yang,Yahoo! co-founder, announced his resignation from the board after 17 years. He has been under pressure for weeks because of his multiple roles in the company.

Captain Suspended

The unit of Carnival that operated a cruise ship that ran aground in Italy suspended the captain, after he apparently steered the ship too close to shore and left the ship with scores of passengers still on board.